Fighting terror with error: The counter-productive regulation of informal value transfers

Crime, Law and Social Change

Volumn 45, Issue 4-5, 2006, Pages 315-336

  Passas, Nikos ^a  

^a NORTHEASTERN UNIVERSITY   (United States)

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EID: 33845501848     PISSN: 09254994     EISSN: 15730751     Source Type: Journal    
DOI: 10.1007/s10611-006-9041-5     Document Type: Article

References (79)

1. Global Development Finance Report 2006. The World Bank. In 2004, an estimated &126 billion was remitted to developing countries (Global Development Finance report 2005).
2. See also, Maimbo, S., Adams, R., Aggarwal, R., & Passas, N. (2005). Migrant labor remittances in South Asia. Washington, District of Columbia: The World Bank.
3. These are names of informal fund transfer systems and networks which essentially employ very similar methods but have different names depending on the ethnic group and location. Hawala - the term denotes 'transfer' in Arabic - is by far the most developed and extensive global network. It emerged in the Indian subcontinent and grew with the assistance of successive immigration waves. The same informal method is called hundi in parts of South Asia, even though the term itself refers to the equivalent of a promissory note. Fei ch'ien is the Chinese variety, while padala refers to Filipino networks. They are all generally discussed under the term 'informal value transfer systems' (IVTS), a term coined by Passas and defined as any network or mechanism that can be used to transfer funds or value from place to place either without leaving a formal paper-trail of the entire transaction or without going through regulated financial institutions at all (for detailed discussions and recent updates on the workings of IVTS and their nexus with illegal activities, see Passas, N. (2003). Informal value transfer systems, money laundering and terrorism. Washington, District of Columbia: Report to the National Institute of Justice (NIJ) and Financial Crimes Enforcement Network (FINCEN). Available at http://www.ncjrs.gov/pdffiles1/nij/grants/208301.pdf;
4. Passas, N. (1999). Informal value transfer systems and criminal organizations: A study into so-called underground banking networks. The Hague, The Netherlands: Ministry of Justice. Available at http://www.wodc.nl/images/ on1999-4_Full%20text_tcm11-5548.pdf;
5. Passas, N. (2004). Informal value transfer systems and criminal activities. The Hague, The Netherlands: WODC. Ministry of Justice. Available at http://www.wodc.nl/images/ca2005-1%20Full%20text_tcm11-74024.pdf.
6. Maimbo, S. M. (2003). The money exchange dealers of Kabul. Washington, District of Columbia: The World Bank; personal interviews.
7. Personal interviews regarding Eastern European, Syrian and Bangladeshi communities in Bulgaria, Germany, Greece, Italy, UAE and USA.
8. See for example, In Re Mexico Money Transfer Litigation (Western Union and Orlandi Valuta); In Re Mexico Money Transfer Litigation (Moneygram), Nos. 98 C 2407, 98 C 2408, United States District Court For The Northern District of Illinois, Eastern Division, 164 F. Supp. 2d 1002; 2000 US Dist. Lexis 18863. A 2005 study of the remittances market by the National Council of La Raza (NCLR), a civil rights and advocacy organization in the US, affirms that reforming the $45 billion Latino remittance market could be conducive to better development and prosperity. NCLR's report, Reforming the Remittance Transfer Market, adds to studies by the Multilateral Investment Fund and Pew Hispanic Center which found that lowering wire transfer company fees by five percentage points may generate annual savings of &1 billion for Latino households;
9. available at http://www.nclr.org/content/publications/detail/31291/.
10. "Workers and their families are needlessly losing money because wire transfer companies charge outrageously high transaction fees - often exceeding 20% of each transaction - which are not clearly spelled out. These practices take advantage of people who work hard and are helping to support their families" said Janet Murguia, NCLR President and CEO. The study notes that an important reason for high fees is a lack of competition from banks and credit unions. Seven in 10 Hispanics (70%) in the US who send remittances use a wire transfer company (see also Orozco (2005). Distant but close: The impact of immigrant remittances. Presentation at the annual FDIC conference in Miami;
11. Orozco, M.(2002). Changes in the atmosphere? Increase of remittances, price decline, but new challenges. Inter-American Dialogue (August 8);
12. Orozco, M. (2004). The remittance marketplace: Prices, policy and financial institutions. Washington, District of Columbia: Pew Hispanic Center).
13. International Monetary Fund. Monetary and Financial Systems Department (2005). Regulatory frame-works for hawala and other remittance systems. Washington, District of Columbia: Monetary and Financial Systems Department, International Monetary Fund; Passas, 1999, 2003, 2004 op. cit.;
14. Schneider, S. (2004). Money laundering in Canada: An analysis of RCMP cases. Toronto: Nathanson Centre for the Study of Organized Crime and Corruption; National Commission on Terrorist Attacks upon the United States (2004);
15. Carroll, L. (1999). Alternative remittance systems. FOPAC Bulletin, 20; US recent cases outlined in May 2005 press release; http://www.ice.gov/graphics/ news/newsreleases/articles/hawalas052305.htm.
16. Minority Staff of the Permanent Subcommittee on Investigations (2001). Correspondent banking: A gateway for money laundering. Washington, District of Columbia: US Senate Committee on Governmental Affairs;
17. Cheran, R., & Aiken, S. (2005). The impact of international informal banking on Canada: A case study of Tamil transnational money transfer networks (Undiyal), Canada/Sri Lanka. Toronto: Law Commission of Canada and Nathanson Centre for the Study of Organized Crime and Corruption; Passas, 1999 op. cit.;
18. Block, A. A., & Weaver, C. A. (2004). All is clouded by desire: Global banking, money maundering, and international organized crime. Westport, Connecticut: Praeger;
19. Calavita, K., & Pontell, H. N. (1990). 'Heads I win, tails you lose': Deregulation, crime, and crisis in the savings and loan industry. Crime and Delinquency, 36, 309-341;
20. Hutchison, R. A. (1986). Off the books: Citibank and the world's biggest money game. New York: William Morrow;
21. Passas, N. (1996). The genesis of the BCCI scandal. Journal of Law and Society, 23(1), 52-72;
22. Passas, N. (1995). The mirror of global evils: A review essay on the BCCI affair. Justice Quarterly, 12(2), 377-419;
23. Perkins, J. (2004). Confessions of an economic hit man. San Francisco: Berrett-Koehler.;
24. Rawnsley, J. H. (1995). Total risk: Nick Leeson and the fall of Barings Bank. New York: HarperCollins.;
25. Economist (1994) Crédit Lyonnais: The bank that couldn't say no. 21-24 (April 9).;
26. Klinger, S., & Sklar, H. (2004) Titans of the Enron economy: The ten habits of highly defective corporations. In N. Passas & N. Goodwin (Eds.), It's legal but it ain't right: Harmful social consequences of legal industries. Ann Arbor, Michigan: University of Michigan Press.
27. Personal interviews with Spanish financial investigators.
28. Passas, N. (2006). Terrorist finance and the nexus with transnational organized crime: Commodities trade. Washington, District of Columbia: Report to the National Institute of Justice;
29. Passas, N. (2006). Setting global CFT standards: A critique and suggestions. Journal of Money Laundering Control, 9, 281-292;
30. Passas, N., & Jones, K. (2006). Commodities and terrorist finance: Diamonds, al Qaeda and Hizbullah. European Journal of Criminal Policy and Research, (in press);
31. Naim, M. (2005). Illicit: how Smugglers, traffickers and copycats are hijacking the global economy. New York: Doubleday;
32. van Schendel, W. & Abraham, I. (2005). Illicit flows and criminal things: States, borders, and the other side of globalization. Bloomington: Indiana University Press.
33. See also European Union Council Regulation (EC) no. 881/2002 (OJ L 139, 29.5.2002, p. 9) and its several amendments at http://ec.europa.eu/comm/ external_relations/cfsp/sanctions/measures.htm;
34. see also the Council Common Position of 27 May 2002 at http://europa.eu.int/eur-lex/pri/en/oj/dat/2002/1_139/ 1_13920020529en00040005. pdf, which was amended on the 27 of February 2003 at http://europa.eu.int/ eurlex/pri/en/oj/dat/2003/1_053/1_05320030228en00620062.pdf.
35. Available at http://www.un.org/docs/sc/committees/1267/1267mg.htm
36. See United Nations High-level Panel on Threats, Challenges and Change (2004). A more secure world: Our shared responsibility. New York: United Nations, Department of Public Information (para. 153).
37. See, for example, Burke, J. (2003). Al-Qaeda: Casting a shadow of terror. London; New York: I.B. Tauris;
38. Naylor, R.T. (2006). Satanic purses: Money, myth, and misinformation in the war on terror. Montreal and Kingston: McGill-Queen University Press.
39. See for example, United Nations list at http://www.un.org/docs/sc/ committees/1267/1267ListEng.htm; the European Union list at http://ec.europa.eu/ comm/external_relations/cfsp/sanctions/list/consol-list.htm;
40. US Treasury's Office of Foreign Asset Controls (OFAC) lists at http://www.ustreas.gov/offices/enforcement/ofac/
41. See, for example, how the business of Western Union's clients is affected in Dubai, where agents must check every 'Khalid, Mustafa and Omar' against the designation lists, ask for further documentation and hold up the transfer in the meantime;: Ivan Gale Money transfers are scrutinised to prevent terrorist funding hup://www.gulfnews.com, 5 July 2006) accessed online at http://archive.gulfnews.com/business/Banking_and_Finance/10051708.html; such practices turn remitters either to informal channels or to the use of false names. Either way, the objective of the rules to achieve transparency and traceability is defeated.
42. There are 13 UN conventions relative to terrorism.
43. For example, a report has found that private contractors employed by US agencies in order to assist other countries in drafting laws meeting international standards "did not result in laws meeting FATF standards" or "had substantial deficiencies" (US Government Accountability Office (2005). Terrorist financing: Better strategic planning needed to coordinate U.S. efforts to deliver counter-terrorism financing training and technical assistance abroad (p. 17). Washington, District of Columbia: GAO).
44. FIU personnel and bank compliance officers from several countries noted in numerous interviews that financial institutions report as terrorism-related suspicious transactions those of persons with names appearing on the various designation lists.
45. Genesis (2004). Access to financial services in South Africa: A brief case study of the effect of the implementation of the financial action tank force recommendations. Cape Town: Genesis Report Prepared for FinMark Trust and DFID.
46. National Commission on Terrorist Attacks upon the United States (2004). The 9/11 Commission Report. Washington, District of Columbia: National Commission on Terrorist Attacks Upon the United States; personal interviews with compliance officer of Western bank where hijackers maintained accounts.
47. Little attention ahs also been paid to the fact that no suspicious activity report was filed for any of the hijackers transfers and, as the 9/11 Commission noted, none should have been filed.
48. Section 359(a) of the Patriot Act defines money transmitters as "any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institution system." Formal and informal remitters are subject to the Bank Secrecy Act (BSA) and are a type of non-bank financial institution in the category of money service businesses (MSBs), which also include check cashers, currency exchangers, as well as issuers, sellers and redeemers of traveler's checks, money orders, and stored value.
49. See 31 CFR 103.41.
50. In more detail, non-registration or the filing of false or incomplete information is subject to a civil penalty of $5,000 per day while the violation continues; the penalty for any person who engages in a money transmitting business and has failed to register or comply with FinCEN's registration regulations is up to five years' imprisonment (18 U.S.C. 1960).MSBs must verify customer identity and record beneficiary information for transfers of more than $3,000 (31 CFR 103.33(1)) and keep such records for five years (31 CFR 103.38). Records for cash transactions for amounts over $10,000 must also be kept to support the filing of currency transaction reports (CTRs) (31 CFR 103.38). Finally, MSBs must file with FinCEN suspicious activity reports (SAR) on any transaction over $2,000 they know or have reason to suspect it involves funds from illegal activity or is designed to conceal their origin, is designed to evade Bank Secrecy Act (BSA) obligations or facilitate criminal activity, or has no apparent business or legal purpose (31 CFR 103.20. The SAR threshold for issuers of traveler's checks and money orders is $5,000). Further duties may be imposed to carry out the purposes of the BSA regulations (31 CFR 103.26), such as a geographic targeting order (GTO), which involve stricter reporting and recordkeeping requirements on financial service providers in a certain area for a limited lime period (e.g., GTOs have involved the lowering of the SAR threshold to &750). Violations of these and other BSA reporting or recordkeeping requirements are subject to civil and criminal penalties and imprisonment (31 U.S.C. 5321-22).
51. Section 1960 of Title 18. 26 Section 1960(b)(1)(A).
52. Forty-three states, the District of Columbia, Guam and Puerto Rico currently license MSBs with legislation pending in several of the other states (Testimony of Diana Taylor, New York State Superintendent of Banks before the United States House of Representatives Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit; June 21, 2006).
53. The National Conference of Commissioners on Uniform State Laws (NCCUSL) has furnished a model law entitled "Uniform Money Services Act" available on http://www.law.upenn.edu/bll/ulc/ulc_frame.htm.
54. It seems that many money remitters do not realize that KYC procedures are required only for remittances over $3,000 and apply the rules across the board.
55. Any indication that the cost of some formal remittance services may be dropping has to be considered against two facts: (a) they were so high that they had a great deal of room to come down and (b) the charges and fees of informal remitters which were low to insignificant before 9/11 have gone up reflecting either the compliance cost or the risk of being caught in case of unlicensed operations. Consequently, the cost ethnic communities have to bear for often double or low triple-digit monthly amounts they wish to send to their families may be going up.
56. OCC Advisory Letter to Chief Executive Officers and Compliance Officers of All National Banks, Federal Branches and Agencies, Department and Division Heads, and All Examining Personnel, AL 2004-7.
57. See testimony of J. Byrne on behalf of the American Bankers Association before the US Senate Banking, Housing and Urban Affaire Committee on April 26, 2005. Similar actions have been reported in Canada; also see Cheran, R., & Aiken, S. (2005). The impact of international informal banking on Canada: A case study of Tamil transnational money transfer networks (Undiyal), Canada/Sri Lanka. Toronto: Law Commission of Canada and Nathanson Centre for the Study of Organized Crime and Corruption.
58. Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the US issued by the Financial Crimes Enforcement Network, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and the Office of Thrift Supervision; see also FinCEN Advisory entitled "Guidance to Money Services Businesses on Obtaining and Maintaining Banking Services," April 26, 2005.
59. See MoneyGram and American Bankers Association statements at the public hearing on "Bank Secrecy Act's Impact on Money Services Businesses" held by the United States House of Representatives Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit,; June 21, 2006 available at http://financialservices.house.gov/hearings.asp?formmode= detail&hearing=482&comm=3.
60. http://www.complianceheadquarters.com/assets/applets/survey.pdf;
61. Between 2005 and 2008, American banks are forecast to spend about $14.7 billion on anti-money-laundering software, hardware, maintenance and other compliance-related activities, according to Neil ICatkov, a Tokyo-based analyst with Celent Communications. Europe and Asia are expected to spend over $11.6 billion during that period"
62. (see Joseph, M. (2005). Your money under scrutiny, wired.com (April 26), accessed at http://www.wired.com/news/privacy/0,1848,67249,00.html).
63. The debates and literature revolving around the 'unbanked' or 'financial exclusion' are relevant here.
64. It is paradoxical also to assume that Iran, which is considered by the US State Department a State sponsor of terrorism, would rely for terrorism on US-based immigrants' remittances, many of whom have fled the country and are very critical of the current regime.
65. UNDP (United Nations Development Programme) (2001). Human development report. New York: United Nations.
66. For a detailed discussion of the federal government's actions with respect to Al-Barakaat including the November raids, see Chapter 5 of Staff Monograpgh on Terrorist Financing (Al-Barakaat Case Study), National Commission on Terrorist Atttacks upon the United States (9-11 Commission) (2004). http://www.9-11commission.gov/staff_statements/911_TerrFin_Ch5.pdf
67. President Bush, for example stated: "Acting on solid and credible evidence, the Treasury Department of the United States today blocked the U.S. assets of 62 individuals and organizations connected with two terror-supporting financial networks - the Al Taqua and the Al Barakaat. Their offices have been shut down in four U.S. states. And our G8 partners and other friends, including the United Arab Emirates, have joined us in blocking assets and coordinating enforcement action" (emphasis added); see full statement at http://www.whitehouse.gov/news/releases/2001/11/20011107-4.html.
68. See footnote 38 at p. 84.
69. Bailey (2001 ). US. call for terrorist financing crackdown affects Somali money exchange. Canadian Press (November 7) 2001 WL 29994214.
70. Kaufman, M. (2001). Somalis said to feel impact of U.S. freeze of al-Barakaat. Washington Post (November 30).
71. Omer, A., & El Koury, G. (2004). Regulation and supervision in a vacuum: The story of the Somali remittance sector. Small Enterprise Development, 15(1), 44-52.
72. See links in footnote 14.
73. At page 23. The full report is available online at http://www.fatf-gafi. org/dataoecd/16/8/35003256.pdf
74. Interestingly, piracy is raising funds for warlords in the current conflicts in Somalia, but the international community has done little to deal with that problem. For instance, in 2004, there were only two attacks Since 15 March 2005, 32 attacks took place off the Somalia coast. They usually hijack the vessel, take it into Somali waters beyond the legal reach of foreign naval vessels and demand substantial ransom. Local militias are behind the pirates, providing them with support and protection. We have little insight into where the funds go, but normally, when the ransom is paid, the crew and vessel are released (Source: ICC International Maritime Bureau, Piracy Reporting Centre). It is also interesting to note that the US government has denied allegations that it is financing terrorist groups in Somalia; see Sanders, E. (2006). US role in Somalia questioned: Government leaders charge U.S. with backing Mogadishu warlords. Los Angeles Times (May 21).;
75. Wax, E. & DeYoung, K. (2006). U.S. secretly backing warlords in Somalia. Washington Post (May 17, A01).
76. Accessed online on the 10th of May, 2006 at http://www.dhs.gov/dhspublic/ display?theme=43&content=5077&print=true
77. Bureau of Immigration and Customs Enforcement.
78. Accessed online on the 10th of May, 2006 at http://judiciary.senate.gov/ testimony.cfm?id=764&wit_id=2112
79. For a brief discussion of solutions to the trade-based problems, see Passas, N. (2006). Setting global CFT standards: A critique and suggestions. Journal of Money Laundering Control, 9, 281-292.